From Lexington: Episode 3

July 28, 2014

Photo: “Lexington Downtown Area Panorama” by Fredgar

This is the third installment in our From Lexington series that chronicles the journey of starting a climbing gym.

by Chris Shotwell

Nicole and I didn’t start out with the intention of opening a new climbing gym in Lexington. Our original plan was to acquire an underperforming gym [location undisclosed] and use the experience of renovating and running it as a springboard to a bigger gym.

We started out by breaking down the cost of making it into what we wanted it to be; an expanded facility, proper training for the staff, tons of new holds, and a whole bunch of maintenance just scratched the surface of our list. I scheduled a meeting with the majority owner of the facility we were looking at and floated the idea of acquiring his business. He was very receptive and offered to set up a meeting with the accountant that they had worked with for the life of the business. We took the meeting, and broke down what we considered to be the existing value of the business.

First and foremost, we didn’t consider the major physical assets to have much value in our acquisition. Physical assets included walls, holds, flooring, furnishings, and anything else that would stay in the building during a sale. The condition and size of the walls and floors was poor at best, leaving these assets virtually worthless to us. The floor was under warranty, and in good condition which allowed us to calculate it as a positive in our valuation. We knew that there was a large amount of maintenance to be done and a major expansion would have to take place to keep the gym competitive in its location.

Outside of the floor, the only thing we considered to give the business real value was its existing customer base. We used the accounts receivable in conjunction with a projection of the life spans of month to month members to create what we considered a fair valuation. We presented an offer based on this valuation to the owners, but found that we couldn’t come close enough to make our plan work. We started to ask ourselves if we were living where we wanted to live, or if we were better off trying to start a new gym where we wanted to be.

Because we went through a failed acquisition process, we were lucky enough to get access to real financials to build our projections from. We started to look at demographics for various different gyms in the size range that we were looking to build and comparing those demographics to the monthly price they were charging and an estimated membership base. We knew what services we wanted to offer, and found it possible to project operating costs based on our level of investment.

From this we were able to determine that Lexington was an economically viable location for the project we wanted. The expenses left room for a profit in the long term; it just required taking the time to build a modest membership base. We looked long and hard at options for developing our facility, finally deciding that a building owned by private equity gave us the best short term and long term cash flow. This lets us re-invest in the business as well as taking time to win customers.

The Business Plan

As soon as we had our location and strategy in place we started to work on a business plan. We wanted to have something that was professional and honest to present to our investors before we even suggested the idea. While I have developed outdoor recreation programs for existing programs, I have never had to write a business plan from scratch. I knew that I needed a framework, and ideally I needed a framework that would help me project tax into my expenses. I found a cloud based business planning software called Enloop, called a local business consultant at the Small Business Alliance, and went to work.

Without working with a true business planning suite and a business consultant, I would certainly have under-projected my payroll expenses. While I haven’t spotted a major mistake that the consultant and I have both made (yet,) I am confident we have made one. With a facility of this size I knew that I needed to eliminate as many mistakes in calculating overhead as possible. Too many small leaks can sink any ship and I do not want this business to fail. The framework the planning software provided, in conjunction with a review by a business consultant, helped me to eliminate as many as possible. I sincerely hope that the mistakes that we did make don’t turn out to be major!

Without a doubt, the hardest part of writing the business plan was determining a fair rate of return for our investor and compensation for Nicole and I. We already had operational costs and income projections that we were comfortable with, but we had to be able to justify the worth of our contributions and the value of the investment. We looked to typical rates of return as compared to risk levels to determine what we thought was fair. Fortunately, our investor agreed with our assessment of the level of risk and the rate of return.

Valuing your own contribution, though, becomes very challenging. Is it better to start with a high salary and hope to achieve success that can support it? Or is it better to start with a modest, but fair salary and build in profit sharing? In the end, we started out with a modest salary. We talked this over with our investor and told him our reasons for starting small. Because Nicole and I make up the Board of Directors, we are comfortable with adjusting our compensation to meet the economic stability of the business. We want this business to succeed and don’t want to leave it hamstrung in the beginning. Our comfort level with our investor gives us confidence that we can make adjustments as they are deserved.

The easiest part of writing the plan for us was projecting what our services would cost. We have been so excited about developing our operational plan that we talk about it in the car, at the crag, walking down the street, or at the grocery store. We can’t stop thinking about how we want people to experience our gym, which left us with a number of proposed programs like youth and adult clubs, pro clinics, group fitness, personal training, and a few other things that we are still keeping under wraps.

In order to project the cost of each program, we just started plugging them into an operational manual and made salary, expense, and space allocations. Adding these pieces up let us easily figure out the size of facility we wanted, the cost of the staff to run it, and the other associated costs we could expect. We started to call around for very rough construction and equipment estimates, marking them up by a set percentage, and projecting payroll expenses. Our strategy of marking up the estimates came about as a piece of advice repeated to us over and over again; nothing is ever the promised price, and it never shows up on time! Plugging all of these projections into our business plan let us quickly come up with a total dollar amount for the investor. As soon as the plan was viable, we scheduled a meeting.

Presenting the business plan to our investor seemed like it would be the hardest part of the whole process in the days leading up to our meeting. We were incredibly nervous about the reaction that our plan would provoke, and even talked multiple times about calling it off. With drawings of boulders and walls littering our home and tons of time dumped into the project we decided that there was nothing to lose by trying.

We showed up to the meeting, presented the idea, and gave our investor time to read the proposal over a nice glass of wine. He asked a few questions about returns and finances, and then asked if we had started thinking about the walls and the programs. We talked for hours about employee development, wall design, and what we wanted our lives to be like. He was receptive and responsive, and was 100% on board from the beginning. The very next day we took our interest in land more seriously and called a broker. This led to an engagement with an attorney that is best left for the next episode!